16 Jun
16Jun

How to Win a Bidding War

 

In a hot housing market, you’ll likely face stiff competition from other buyers. To improve your odds of coming out on top, you’ll need a plan of action.Here are some pointers to increase your odds of winning the battle for the home you covet:

  1. Get Preapproved – Not only is preapproval from a mortgage lender a wise step, but it is also essential for anyone in a competitive bidding situation. Prequalification is not enough; it does not show that the lender conducted the same amount of due diligence such as checking your income and conducting a hard credit check that a preapproval requires.
  2. A bidding war is unfortunately like an auction, but you need to know how much house you can afford before bidding.

One tactic is to include an escalation clause in your offer to ensure you can instantly counter any other offer. This tactic allows you to automatically increase your bid to out-offer a higher bid to a specified amount. For example, if a home is priced at $400,000 and you know you will face competition, you could offer $405,000 and agree that you’ll beat any other bids by $5,000 up to to $430,000. While this is an aggressive tactic, it shows the seller how serious you are.Another wise move is to provide extra earnest money which is a form of a security deposit in a purchase contract, which gives the seller assurance that you’ll follow through with the purchase. If you put down more than the average earnest money amount in the region where you are buying, it signals the seller that you are a very serious prospective buyer.The safest option is always offering all cash for the property. This is because you’ve eliminated the possibility of the mortgage falling through at some point during the buying process due to unforeseen circumstances. Additionally, offering all cash will speed up the process because you won’t need to go through the approval process with the lender. This is music to any sellers’ ears.

  1. Remove Contingencies – A contingency in the contract gives you the option to exit the deal without penalty (losing your earnest money) if something unexpected happens on the buyer’s side. For example, if you are unable to sell your existing home in time to close which would free up your cash for the purchase of the new one. But in a bidding war, the last thing the buyer wants to see are contingencies, as it may possibly allow the deal to fall through, in which case the seller must begin the process again with a new buyer. From the seller’s perspective, this is a waste of his time – and time is money.
  2. Be Flexible on the Move-in Date – A seller might need more time to take care of details and delays on his end before he moves out. For example, maybe the home he is buying is new construction and the finished product is running a bit late. So, assure the seller that you will be flexible and work with him in this regard.
  3. Write a Personal Note – Guess what? Sellers are human beings, and they may be moved by a warm personal note explaining why this particular home is the home of your dreams.

With the above conventional wisdom in mind, here are some facts derived from a survey by Redfin (a major internet real estate platform). While the study confirms the effectiveness of some of the tactics listed above, it also indicates which ones are not as successful. But remember, just because this particular survey offers certain insights about which strategies are most successful and which are less so, does not mean those tactics should necessarily be ignored. Let’s see what the Redfin survey says:Buyers who offered all cash were more than four times more likely to win a bidding war. According to the analysts, all cash offers are the most effective strategy in a bidding war.The Redfin survey also confirms the above accepted wisdom to waive contingencies (especially concerning mortgage approval) to speed up the process. Buyers who employed this strategy were 31% more likely to win a bidding war than those who didn’t.But according to the survey, using an escalation clause wasn’t as successful as the other tactics because others may be employing the same idea.I decided to write this article because of its timeliness, as more than 30% of homes sold in 2021 were above the asking price (this stat often means a bidding war is occurring), a percentage that climbed to 43% in February 2022.Redfin also recommends considering offering above the asking price as an opening offer and waiving the appraisal contingency.The Lesson – Get a good, experienced agent, and set up a winning strategy with him/her to successfully navigate the intricacies of a bidding war. 

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